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Currencies

Yuan's slide to decade low puts China in tricky position

A fall below 7 per dollar risks capital flight; defending it seen as manipulation

The Chinese yuan slid to a decade low against the dollar on Tuesday, igniting speculation about whether Beijing would intervene in the market to defend its currency from falling below seven to the dollar. (Getty Images)

BEIJING -- As the yuan slid to a 10-year low of 6.9701 against the dollar on Tuesday morning, hovering dangerously near the politically sensitive level of seven to the greenback, all eyes were on the actions of the Chinese authorities.

The People's Bank of China on Tuesday set the yuan midpoint at 6.9574 to the dollar, 0.28% lower than the previous day and the lowest level since May 2008.

Beijing is especially sensitive about the yuan's movements and does not want to be seen as a currency manipulator. In the past, it had been accused of entering the market to keep the yuan weak, making its exports cheaper and more competitive. This time, it faces the problem of the yuan having tumbled too much.

Mizuho Research Institute Senior Economist Yusuke Miura said "all circumstances point to a weaker yuan." He referred to the deterioration in China's current account balance that has been caused by a slowdown in exports and interest rate hikes in the U.S. as adding pressure to the yuan.

However, he said that it remains to be seen if Beijing will allow the yuan to fall below the seven level. If it falls below that psychologically important level, many market participants say they expect a widespread yuan sell-down which would only further erode its value. "That's unacceptable for China," Miura added.

The Chinese government has denied it is interfering with the market. "Instead of engaging in competitive devaluation, we will stick to market-oriented foreign exchange rate reform," Chinese Premier Li Keqiang said in September in a speech at the World Economic Forum in Tianjin.

Chinese state media Xinhua News Agency published an article on Tuesday morning, stating that defending the yuan at seven to the dollar is an action that the authorities could take.

Washington has been an especially loud complainant about China's currency interference, pointing to it as a factor for its trade deficit. The U.S. Treasury stopped short of calling Beijing a "currency manipulator" in its semiannual report released on Oct. 18. But U.S. officials also said Beijing appeared to be doing little to make clear its stance on the movements in the market.

"Of particular concern are China's lack of currency transparency and the recent weakness in its currency," said Treasury Secretary Steven Mnuchin.

U.S. President Donald Trump and Chinese President Xi Jinping are set to meet late November on the sidelines of a G-20 summit meeting in Argentina. Recent media reports suggest that the trade issues could be off the agenda for the leaders of the two biggest economies in the world. But if they do discuss it and bilateral relations deteriorate as a result, the yuan may spiral even lower, market participants said.

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